Introduction to Bonds
1. What are the advantages of a fiscal agent / a trustee for the issuer?
Fiscal Agent
cheaper than a trustee because: there is less documentation (no PPA agreement) to negotiate;
fiscal agency agreement is less negotiated than a trust deed; and because
fiscal agent will not require separate legal advice (for which the issuer pays).
Their fee is cheaper than a trustee’s fee.
carries out the Principal Paying Agent (‘PPA’) role (and this is included in its fee).
If a trustee is used, a separate PPA will need to be appointed which increases costs as the PPA will want a fee and a separate
PPA Agreement will need to be drawn up.
N.B. Costs are usually borne by the Issuer
Trustee
flexibility -> allow for non- prejudicial matters to be sorted or a waiver to be granted by the trustee w/o convening a meeting
of bondholders
Dealing with a single professional entity representing the interests of the bondholders as a whole
prevents multiplicity of actions and prevents a single bondholder calling default.
Taking a longer term view may ensure the survival of the issuer and full repayment in due course
Used when Issuer is professional and experienced entity
Bondholders prefer having a trustee -> trustee makes the bond more marketable (issuer pays less interest)
What are the advantages of a trustee for the bondholders?
1. The trustee owes the bondholders a duty of care – it represents the bondholders’ interests.
2. The bonds will be more marketable (easier to sell on).
3. Due to its experience and being a single professional entity, the trustee will be in a better position to negotiate for the
LPC: DEBT FINANCE SGS 6 ACTIVITY 3 SOLUTION
bondholders if the issuer is looking to restructure its debt – a trustee has more influence than individual bondholders.
4. A trustee can chair bondholder meetings and make recommendations.
5. Part payments will beDEBT
shared pro rata amongst the bondholders by the trustee (so a powerful bondholder can’t negotiate
FINANCE SGS 6:
itself a better deal at the expense of the other bondholders).
6. A trustee has (limited)BONDS:
investigative and monitoring
PARTIES powers.
AND DOCUMENTATION
7. A trustee can call defaults for the bondholders.
Legal Practice Course
Are there any specific circumstances where a trustee will need to be appointed in respect of the bonds?
Secured bonds (a fiscal agent cannot hold the security for the bondholders as it acts for the issuer)
Subordinated or convertible bonds
Activity 3 Solution
Complicated financial covenants (a trustee can deal with the complicated mechanics)
1. The following are parties involved in Aurora Baggio PLC's latest bond issue:
Example:
Issuer: Aurora Baggio PLC
Trustee: Castledown Davies PLC Principal Paying Agent: Economique Bank
PLC
Legal advisers: Greystoke Hamilton LLP and Iveson Jacks LLP
Auditors: Khan Lane LLP
Lead Manager: Manchester Newman Bank PLC
Co-Lead Managers: Oxford & Portsmouth Bank PLC and Q.R. Stein Bank PLC
(a) Name the four key agreements which will need to be in place at the
(a) Name the four key agreements which
signing andwill need
closing to Aurora
of the be in place
Baggioat the
PLC signing
bond issue?and closing of the Aurora Baggio PLC bond
issue? Subscription Agreement, Trust Deed, Principal Paying Agency Agreement
Subscription Agreement, and Agreement Among Managers.
Trust Deed, (b) Who will be the parties to these documents?
Principal Paying Agency Agreement and
Agreement Among Managers Subscription Agreement: Aurora Baggio PLC (Issuer), Manchester
Newman Bank PLC (Lead Manager) and Oxford & Portsmouth Bank PLC
and Q.R. Stein Bank PLC (Co-Lead Managers).
(b) Who will be the parties to these documents?
Trust Deed: Aurora Baggio PLC (Issuer) and Castledown Davies PLC
(Trustee).
Principal Paying Agency Agreement: Aurora Baggio PLC (Issuer),
Economique Bank PLC (Principal Paying Agent) and Castledown Davies
PLC (Trustee).
1. What are the advantages of a fiscal agent / a trustee for the issuer?
Fiscal Agent
cheaper than a trustee because: there is less documentation (no PPA agreement) to negotiate;
fiscal agency agreement is less negotiated than a trust deed; and because
fiscal agent will not require separate legal advice (for which the issuer pays).
Their fee is cheaper than a trustee’s fee.
carries out the Principal Paying Agent (‘PPA’) role (and this is included in its fee).
If a trustee is used, a separate PPA will need to be appointed which increases costs as the PPA will want a fee and a separate
PPA Agreement will need to be drawn up.
N.B. Costs are usually borne by the Issuer
Trustee
flexibility -> allow for non- prejudicial matters to be sorted or a waiver to be granted by the trustee w/o convening a meeting
of bondholders
Dealing with a single professional entity representing the interests of the bondholders as a whole
prevents multiplicity of actions and prevents a single bondholder calling default.
Taking a longer term view may ensure the survival of the issuer and full repayment in due course
Used when Issuer is professional and experienced entity
Bondholders prefer having a trustee -> trustee makes the bond more marketable (issuer pays less interest)
What are the advantages of a trustee for the bondholders?
1. The trustee owes the bondholders a duty of care – it represents the bondholders’ interests.
2. The bonds will be more marketable (easier to sell on).
3. Due to its experience and being a single professional entity, the trustee will be in a better position to negotiate for the
LPC: DEBT FINANCE SGS 6 ACTIVITY 3 SOLUTION
bondholders if the issuer is looking to restructure its debt – a trustee has more influence than individual bondholders.
4. A trustee can chair bondholder meetings and make recommendations.
5. Part payments will beDEBT
shared pro rata amongst the bondholders by the trustee (so a powerful bondholder can’t negotiate
FINANCE SGS 6:
itself a better deal at the expense of the other bondholders).
6. A trustee has (limited)BONDS:
investigative and monitoring
PARTIES powers.
AND DOCUMENTATION
7. A trustee can call defaults for the bondholders.
Legal Practice Course
Are there any specific circumstances where a trustee will need to be appointed in respect of the bonds?
Secured bonds (a fiscal agent cannot hold the security for the bondholders as it acts for the issuer)
Subordinated or convertible bonds
Activity 3 Solution
Complicated financial covenants (a trustee can deal with the complicated mechanics)
1. The following are parties involved in Aurora Baggio PLC's latest bond issue:
Example:
Issuer: Aurora Baggio PLC
Trustee: Castledown Davies PLC Principal Paying Agent: Economique Bank
PLC
Legal advisers: Greystoke Hamilton LLP and Iveson Jacks LLP
Auditors: Khan Lane LLP
Lead Manager: Manchester Newman Bank PLC
Co-Lead Managers: Oxford & Portsmouth Bank PLC and Q.R. Stein Bank PLC
(a) Name the four key agreements which will need to be in place at the
(a) Name the four key agreements which
signing andwill need
closing to Aurora
of the be in place
Baggioat the
PLC signing
bond issue?and closing of the Aurora Baggio PLC bond
issue? Subscription Agreement, Trust Deed, Principal Paying Agency Agreement
Subscription Agreement, and Agreement Among Managers.
Trust Deed, (b) Who will be the parties to these documents?
Principal Paying Agency Agreement and
Agreement Among Managers Subscription Agreement: Aurora Baggio PLC (Issuer), Manchester
Newman Bank PLC (Lead Manager) and Oxford & Portsmouth Bank PLC
and Q.R. Stein Bank PLC (Co-Lead Managers).
(b) Who will be the parties to these documents?
Trust Deed: Aurora Baggio PLC (Issuer) and Castledown Davies PLC
(Trustee).
Principal Paying Agency Agreement: Aurora Baggio PLC (Issuer),
Economique Bank PLC (Principal Paying Agent) and Castledown Davies
PLC (Trustee).
